Consumers are pulling back on applying for mortgages to buy new homes or refinance their current houses, and while the foreclosure crisis may be playing a role in the decline, rising interest rates are also partly to blame.

According to the Mortgage Bankers Association (MBA), applications for mortgages declined 10.5% for the week ending Oct. 15, the biggest drop in four months. Applications for home purchases were down 6.6% compared to the previous week and declined nearly 30% compared with year-ago levels. Refinancing applications fell an even larger 11.2%. The association said that was likely linked to the fact that average rates on 30-year fixed mortgages increased from 4.21% -- the lowest level on record -- to 4.34% last week.

"Bigger picture, there may be a psychological component to this," says Michael Fratantoni, MBA vice president for research and economics. "It may be just another aspect of the uncertainty with respect to the mortgage market right now, and it may cause people to pause regardless of whether they are thinking about a purchase or refinance."

According to the MBA's latest statistics, about 80% of applications are for refinancing, and the remaining 20% are for home purchases. Of the latter amount, 20% to 30% are for distressed sales such as foreclosures.

A Foreclosure Market in Disarray

Whatever its impact on mortgage applications, the turmoil over allegations that big banks didn't follow proper legal procedures in processing foreclosures has been immense, prompting some major financial institutions, including JPMorgan Chase (JPM), to suspend foreclosures while they investigate what went wrong.

Bank of America (BAC) and GMAC, two of the country's biggest mortgage lenders, announced on Oct. 18 that they would resume making foreclosures later this month. BofA said it had checked more than 100,000 files and had found nothing wrong.

David Crowe, chief economist of the National Association of Home Builders, says BofA's decision to resume foreclosures is one of a number of factors that suggests the problem may be resolved more quickly than previously thought. Treasury Secretary Timothy Geithner said last week that the Obama administration opposed a nationwide moratorium on foreclosures.

"The housing recovery is in fragile condition right now, and any additional uncertainty does worry me and others in the housing market," Crowe says. 'If we can get rid of the uncertainty, then I think sales will be back on track. If it lasts a long time, it could have a significant impact on all sales."

But in New York State uncertainty is likely to rise in the near term because the state court system instituted new rules on Oct. 20 for lawyers handling foreclosures that will force a complete overhaul of standard practices. That puts nearly 78,000 foreclosures pending in New York on hold until the new rules get implemented at law firms statewide. And if other states follow New York's lead, the entire picture could change.
Hints of Optimism in Housing

At least new-home sales have begun to creep back up after falling off a cliff in May, when the federal government's homebuyer tax credits ended. New homes were selling at a 414,000 annualized rate in April, then slumped to 282,000 in May after the credit expired. In August, 288,000 new home were sold (the last month for which numbers are available).

Crowe says he's encouraged by the fact that single-family housing starts were up 4.4% last week, according to the Census Bureau. At the same time, an index of homebuilder sentiment edged up this week from 13 to 16 out of 100 -- still very low, but an increase nonetheless.

Says Crowe: "The survey suggests builders are seeing a little more activity from the consumer and that builders are confident enough to begin the start of a few more homes." If more folks started applying for mortgages, that would be an even better sign.

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Cherie

High unemployment uncertain future. Not to mention the Freddie and Fanny thing has not come to a head. And the writer is wondering why a drop in applications? Easy it went the way of shovel ready jobs. You cannot get blood from a stone. No matter how you slant it.

MAYBE IT HAS SOMETHING TO DO WITH LACK OF JOBS AND THE HUGE FEES INVOLVED WITH REFI'S WHO WOULD REFI WHEN IT WOULD TAKE YOU 3 OR MORE YEARS JUST TO GET BACK WHERE YOU WERE...BANKS HAVE IT SET UP SO IT'S SWEET FOR THEM NOT YOU.

Gee the economy is down the tubes, banks are making it impossible to borrow - no jobs - people are scared to spend a dime if they have a job - taxes , food, gas are going up - but Senators, congressman are getting raises - Gee, can't figure out why no one is running out and buying Mickey Mansions or regular housing---duh

YOUR'RE WRONG TO SAY IT'S YOUR OWN FAULT. I HAVE SEEN BANKS GIVE RETIREEE'S AND FIRST TIME HOME BUYERS ALL SORTS OF BUYERS THAT IS. 0% LOANS 120% LTV, 40 YR MRTGAGES. WHAT THE H..? IS THAT ABOUT. BELIEVE ME THAT THERE ARE MORE PEOPLE WHO DO NOT UNDERSTAND FINANCING REGARDLESS OF AGE. THEY JUST WANT TO GET INTO A HOME. BROKERS AND BANKS ARE SMOOTH TALKERS AND GET THEM TO GO ALONG. TEST IT YOUR SELF AND BE A "SECRET SHOPPER" YOU WON'T BELIEV THE CRAP YOU'LL STILL HEAR FROM THEM EX: " OH THE RATES ARE SO LOW, YOU WON'T HAVE TO WORRY IF THEY GO UP 2% YR YOUR HOUSE WILL GO UP IN VALUE AND YOU'LL BE EARNING MOPRE MONEY" YOU'LL BE FINE JUST SIGN HERE" DID I MENTION MY BONUS FOR SIGNING YOU UP? POINTS AND FEES? AFTER I SIGN YOU I DON'T VARE IF YOU EVER MAKE A PAYMENT. I'VE BEEN PAID JUST FOR GETTING YOUR SIGNATURE" THEY ALSO TELL POTENTIAL RETIREES THAT THERE IRA OR 401K WILL BE AVAILABLE TO THEM SOON TO HELP MAKE PAYMENTS.... AMAZING BAIL OUT

You sound like they(the evil banks) are trying to sell you some thing and they make money on it, it's almost like you are saying I should be cautious and think for myself before I sign, what a concept. The problem is the banks have some one to sell the loan to, your government (fannie and freddie). If you get the government out of the banking business then the banks will have to be responsible again.

tHAT'S RIGHT. tHE BANKS INCREASED THEIR STOCK VALUES AND DIDN'T HELP OUT ANYONE WITH THE BAILOUT MONEY. YOUWOULD THINKA REFI THAT SAVES SOME ONE 500-700 PER MONTH IS GOOD FOR BOTH THE BANK AND CONSUMER. THE BANK IS AT LESS RISK EVERY MONTH OF BEING PAID BUT YOU STILL NEED VREY GOOD CREDIT THESE DAYS TO GET ANYWHERE WITH THEM. WHAT A JOKE. IF YOU FELL ON HARD TIME AND NEED TO SAVE 700 PER MONTH ON A MORTGAGE PAYMENT, THOSE HARD TIME MORE THAN LIKLEY BROUGHT YOUR SCORE DOWN AS WELL ADVICE;; IF GOING INOT A BUSINESS, GET PRIVATE INVESTORS BEFORE A BANK. THEY ARE WORTH IT THE RISK IS ELIMINATED BY SHARING THE COMPANY. BANKS ARE AWFUL!!!!!!!!

41/2 percent loans, dont even keep up with Inflation; if you have erned alot of money, in your lifetime, its my openion the way the dollar is going , gold is looking like a safer investment, It is the REAL MONEY..

What a dopey article! Applications don't drop because the 30 year rate climbs from 4.21 to 4.34! Most people aren't even aware of what the 30 year rate is until they ask the lender. In fact, a small rise in interest rates can sometimes trigger an increase in applications, because people want to lock in before rates go higher. Mr. Wallace is obviously feeding off the release yesterday which said Applications drop AS interest rates rise. If there's one thing I learned in college it's that when two separate events occur at the same time, they don't have to be cause and effect, but merely correlational. Come on, Mr. Wallace, think outside the box!